Credit won’t be a growth catalyst for US consumer spending

Macro Highlights
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28/03/2017

Consumer lending growth in the US eased in January after banks tightened lending conditions in response to higher delinquency rates. Leading economic indicators for the Euro zone show that its economy is continuing to gain speed. The slowdown in lending to non-financial corporations should not last.

In the United States, household debt – which includes mortgage loans and consumer lending – surpassed pre-crisis levels in Q1 2016 and stood at USD 14.756 trillion in Q4 2016, or 78% of GDP. But in January 2017, growth in consumer lending slowed to 6.3% year over year from 6.5% in December 2016. At the same time, banks have been tightening their conditions for automobile and credit-card loans in H1 2017 (see left-hand chart on next page), although this has not been true for mortgages. The stricter lending terms come in response to an uptick in charge-offs and delinquency rates seen in late 2016 (see chart).

One reason for the higher delinquency rates could be an increase in the prime rate charged by banks, from 3.25% in November 2015 to 3.75% in February 2017 (see chart). Over the same period, a rise in inflation – from 0.4% in November 2015 to 2.8% in February 2017 – pushed down real interest rates, but those rates should pick back up in the coming months as the consumer price index returns to around 2%. And those higher rates could further push up the number of delinquent loans. Consumer surveys indicate that households are expecting lending conditions to tighten, which means that consumer lending figures for February could show a further decline. Today’s higher interest rates support our forecast of flat consumer spending in the first half of 2017.

On Friday, 17 March, the US House of Representatives refused to pass Donald Trump’s healthcare reform bill, the American Health Care Act (AHCA). This failure to repeal and replace Obamacare disappointed investors, who took it as a sign the new administration would struggle to pull together enough votes in Congress to pass Trump’s other campaign promises. The dollar weakened on the news, sliding from 1.08 against the euro Friday night to 1.09 at the time of writing, and the 10-year Treasury yield dropped from 2.42% to 2.35%. The Congressional Budget Office (CBO) estimated that Trump’s bill would save just USD 150 billion between 2017 and 2026, since it would cut not only government spending, but also some of the income brought in by Obamacare. The CBO calculated that by 2026, 52 million people under the age of 65 would be without insurance under the AHCA, compared with 28 million under existing legislation. The Trump administration will now need to focus its efforts on personal and corporate income tax cuts so that it can submit an initial proposal by this summer.

The latest economic data in the Euro zone point to a further pick-up in growth, continuing the trend started in late 2016. The Purchasing Managers Index (PMI) once again surprised on the upside, outstripping even the most optimistic forecasts. It rose from 56 in February to 56.7 in March – its highest level in nearly six years. And the upward trend was mirrored in the currency bloc’s two biggest economies: in France the composite PMI shot up from 55.9 in February to 57.6 in March, lifted by an improvement in the services sector; and in Germany, the composite PMI edged up from 56.1 in February to 57 in March, buoyed by strong export demand for its manufactured goods.

Household debt in the Euro zone expanded further in February to 2.3%, driven by a 2.8% increase in mortgage lending – a sign of the ongoing recovery in that region’s property markets. Growth in loans to non-financial corporations eased from 2.3% in January to 2% in February. But according to the ECB’s Q1 2017 bank lending survey, this slowdown shouldn’t last long. After tightening lending conditions slightly in the final quarter of last year, banks plan to loosen them in the first quarter of this one, and they expect demand for business loans to swell further.

These figures support our forecast of 0.6% quarter-on-quarter GDP growth in the Euro zone in Q1 2017. This would be the second-fastest expansion in output since 2011 (see chart). That said, we still think the ECB will keep its asset purchase programme in place this year. The negative output gap is keeping a lid on core inflation, which currently stands at 0.9%.